We Like These Underlying Return On Capital Trends At Aehr Test Systems (NASDAQ:AEHR)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Aehr Test Systems' (NASDAQ:AEHR) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Aehr Test Systems:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = US$13m ÷ (US$102m - US$9.2m) (Based on the trailing twelve months to February 2024).

So, Aehr Test Systems has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Semiconductor industry.

See our latest analysis for Aehr Test Systems

In the above chart we have measured Aehr Test Systems' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Aehr Test Systems .

So How Is Aehr Test Systems' ROCE Trending?

The fact that Aehr Test Systems is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 14% on its capital. And unsurprisingly, like most companies trying to break into the black, Aehr Test Systems is utilizing 499% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 9.0%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Aehr Test Systems has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

To the delight of most shareholders, Aehr Test Systems has now broken into profitability. And a remarkable 663% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Aehr Test Systems can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Aehr Test Systems we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.